The Financial Conduct Authority has said it needs to carry out more analysis on whether to ban contingent charging, recognising that charging for advice only when a member decides to transfer does not in itself drive poor outcomes for consumers.
Transfer scandals surrounding the British Steel Pension Scheme have put pressure on the FCA, whose position has always been that transfers are unsuitable in the majority of cases, to crack down on poor adviser practices.
The watchdog estimates that 100,000 members are transferring out of their defined benefit scheme every year. The average transfer value exceeds £250,000.
Contingent charging was a symptom of what was happening specifically down in Port Talbot from British Steel, rather than the underlying cause
Simon Harrington, PIMFA
The FCA released proposals in March outlining greater consumer protections for those seeking to transfer their pension, following a previous finding that just 47 per cent of the advice it reviewed on DB to defined contribution transfers could be shown to be suitable. It did not propose a ban on contingent charging, but sought views on the practice from industry.
While the FCA has not chosen to ban contingent charging with its latest policy paper, it is pushing ahead with more stringent qualifications for advisers and a requirement to better assess clients' understanding of risk.
Some experts cautioned that the new suggested processes for triage services, which seek to strengthen the boundary between exploratory conversations on transfers, and concrete advice, could limit advisers' flexibility.
Causation or correlation?
In February, the Work and Pensions Committee called for contingent charging to be banned in the wake of the BSPS scandal. The scheme's closure precipitated a wave of unsuitable advice for steelworkers looking to transfer out of their scheme.
The FCA said that only 51 per cent of the advice given to steelworkers that it reviewed was suitable, and at the time, an FCA spokesperson said: “We believe the committee’s recommendations are sensible”.
In today’s policy statement, the watchdog said that feedback has confirmed “our initial thoughts that any causal link between contingent charging and suitability is difficult to prove”.
It added: “Charging models are only one of the potential drivers of unsuitability, and they need to be considered amongst other factors."
The FCA said that should any further changes be deemed appropriate, it will consult on these in the first half of 2019.
Simon Harrington, senior public policy adviser at the Personal Investment Management & Financial Advice Association, welcomed the policy statement.
“Contingent charging was a symptom of what was happening specifically down in Port Talbot from British Steel, rather than the underlying cause,” he said, “which was essentially a cauldron of a number of different issues, and contingent charging came out of that as the bogeyman,” he added.
However, others believe that the practice creates an incentive to transfer, and called for the FCA to take action. First Actuarial director Henry Tapper said the watchdog has "kicked the can down the road".
While Jonathan Camfield, partner at LCP, sympathised with the view that banning contingent charging could reduce access to financial advice, he felt that the current framework promotes a bias towards recommending transfers and allows advisers to collect excessive fees.
"In our view, the best advice model is for trustees and employers to work together to appoint an [independent financial adviser] to their scheme who understands the scheme benefits," he said.
This model "can deliver demonstrably unbiased advice for a flat fee of less than £1,000 per member, which might be subsidised by the scheme or employer," he added.
Conversations need to happen before advice
The FCA is pressing ahead with "new perimeter guidance" for triage. Given that transfer advice can only result in a decision on whether or not to proceed, it said that the scope for providing guidance during triage is limited.
“Any guidance based on a consideration of a customer’s circumstances which steers them one way or the other is likely to be advice on the merits of a transfer, and therefore pension transfer advice,” the FCA clarified.
“In comparison, it is possible for firms to have broad-ranging conversations about investments, for example on different asset classes, without these being considered to be advice,” it adds.
Nathan Long, senior analyst at Hargreaves Lansdown, warned that advisers may simply refuse to discuss transfers unless they are able to charge. This could push more members into contingent charging, he added.
“Where people are able to have quite open conversations about the extent to which a transfer is or isn’t advisable, you may be able to help a client make their own decision as to whether that’s a good thing or not,” he said.
Transfer specialist standards are rising
The tragedy of Port Talbot has pressed home the need for better quality advice and for clients to have a greater understanding of the risk of taking a transfer.
Advisers will be required to provide suitability reports when recommending that a transfer should not be undertaken.
Pension transfer specialists will need an additional investment qualification, and the exam standards to qualify as a PTS have been updated.
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Tom Selby, senior analyst at AJ Bell, praised the FCA’s policy statement, recognising that the watchdog “doesn’t want to completely strangle the advice market”.
“It’s easy to get overly emotional when looking at things like this,” he said, arguing that a ban on contingent charging would “have a huge impact” on a market that is already experiencing problems with the supply of advice.
